Growth steps overshadowed by confusing tax language and somewhat iffy revenue targets
Given the state of the economy—Q3 growth, data out Thursday showed, crashed to 4.5% as compared to 5.3% in Q2—few expected finance minister P Chidambaram to deliver any fancy growth-enhancing tax sops or massive investment allowances. Sensible fiscal consolidation and clarity on tax laws, along with pushing the Cabinet Committee on Investments to clear Rs 7.5 lakh crore of stuck projects, was all that industry wanted. To a certain extent that’s what the FM delivered, in the sense he has stuck to his fiscal consolidation plan—FY14’s fiscal deficit is projected to be 4.8% of GDP and even FY13’s deficit, despite the disastrous Budget by his predecessor and the collapse in GDP, was just 0.1% of GDP more than the original target thanks to very aggressive expenditure corrections.
Though not strictly part of the Budget, the FM has said the coal sector is likely to be opened up to PPPs, as petroleum exploration was several years ago; a better revenue-share regime for oil exploration is on the cards, as is a roads regulator; there are a series of sops for infrastructure, including more tax-free bonds, extending of power tax holidays and sensible credit enhancement measures and even the return of the investment allowance; needless confusion over FII and FDI definitions have been cleaned up and, the biggest relief, there has been a very small increase in the food subsidy despite the introduction of the Food Security Bill—obviously, the cash-strapped FM has managed to contain the NAC to a large extent.
Ironically, the FM’s pre-Budget global road-shows heightened expectations, so the markets reacted violently—the Sensex fell 358 points intra-day before closing 291 points down—as news came of tax fine-print that, for instance, said a Mauritius government tax residency certificate would not be enough to avoid paying taxes. The government later said it would issue a clarification if need be, but there was more in store—in the case of GAAR, while the onus of proving tax avoidance was put on the taxman after the Shome Committee examined the matter, the Finance Bill put the onus back on the assessee. And, despite the hope generated by the Shome Committee’s recommendations on retrospective taxation, the Budget was silent on this big sentiment-dampener.
Political compulsions—this could well be an election year—probably forced the finance minister to give up his known reticence for expenditure control, but there could be some sleight of hand here. After a sharp expenditure compression of Rs 60,000 crore in FY13, the FM has budgeted a 16.9% hike in FY14 expenditure—a growth last seen in FY11 when economic growth was 9.3% as compared to FY14’s likely 6.3-6.5%. Within this, the politically sensitive rural development is to see a 43% hike in expenses, after seeing a 20% fall in FY13.
The sleight of hand involves the aggressive budgeting the finance minister has done. While the economy is barely out of the woods, he’s budgeted a 21% hike in revenues which includes a 19% increase in tax revenues along with a two-and-a-half times increase in revenues from disinvestment and from spectrum auctions. Indeed, the fiscal compression done by the finance minister by bringing down the fiscal deficit from 5.2% of GDP in FY13 to 4.8% in FY14 adds up to Rs 45,000 crore, which is less than the Rs 51,000 crore extra that he’s looking for from disinvestment and spectrum sales in comparison to what was achieved in FY13. Which suggests that, since fiscal consolidation is very clearly back on the agenda, a slippage in tax or non-tax collections will likely be matched by an equally sharp compression in expenditure. This will be difficult in an election year, but it does seem impossible for the rural development ministry, for instance, to possibly spend the kind of allocation it has got. The biggest challenge, of course, will be in the case of subsidies where the finance minister is looking at subsidies falling to below 2% of GDP, a figure last seen before the Lehman crisis. This suggests the FM is serious about diesel prices being raised by 45-50 paise a litre every month for the rest of the year—though the Economic Survey points out that just 3-4% of LPG subsidies are given to the lowest quintile, cutting subsidies is going to be a big challenge. There will be pressure to raise outlays on the Food Security Bill which, going by CACP chief Ashok Gulati’s estimates, is woefully under-budgeted—against Rs 90,000 crore budgeted for in FY14, Gulati reckons the Bill will need Rs 6 lakh crore over 3 years.
In other words, the finance minister has managed to deliver an extremely difficult Budget, balancing the political needs of his party along with the exigencies of the economy—he said the mool mantra was that you can’t have inclusive and sustainable development without having higher economic growth. The problem with this kind of tight budgeting is that in the case of one slip—if the government doesn’t get spectrum pricing and telecom policies right, spectrum auctions will flop again—the entire knitting starts to unravel. Which means the finance minister needs the entire government to back him. The Budget is just a statement of intent—for it to work, the CCI needs to clear projects, the taxman’s adventurism needs to be tempered, the states need to agree on a GST that is not riddled with so many holes that make it all but useless. What clearly the eye discerns as right, as the FM quoted his favourite poet Saint Thiruvalluvar as saying, “with steadfast will and mind unslumbering, that should man fulfil”.